Appointment, qualification and purpose of directorships

'The success of every company depends ultimately on the calibre of its directors and the effectiveness of its board.' Bob Tricker, The Pocket Director

What is a director?

'A company as an artificial legal entity can act only through its human ‘agents’, i.e. its directors or officers. Although in many private companies the shareholders and directors are the same people, in their capacities as directors they are the legally accountable custodians of the company who may be liable for penalties if they do not ensure the company’s compliance with its legal obligations.

The Companies Act gives no precise definition of the term ‘director’, merely stating in section 1(1) that a director includes ‘any person occupying the position of director or alternate director of a company, by whatever name he may be designated’. The term ‘board’ is the collective term used to designate the directors when they act together as a group.' †

Legally, there is of course no distinction between executive and non-executive directors, nor indeed between directors and officers of the company, and they all remain equally accountable for the proper conduct of its affairs. There are in fact no such creatures in law as executive and non-executive directors, and they, along with the independent and shadow directors defined by the 2002 King Report on Corporate Governance (“King II”), are little more than creations of corporate governance literature. A director, once appointed is just that – a director of the company.

Executive directors are simply directors who have certain executive responsibilities, which are distinct from and in addition to their role as directors of the company. The term ‘officer’ is often used interchangeably with director but it specifically includes a chief executive, manager (who need not be on the board) and the company secretary. [§1(1)]

Appointment of directors

Although the company's shareholders are usually authorised by the articles to appoint directors, in practice the board of directors appoints most directors. These appointments must then be confirmed at the first Annual General Meeting (AGM) after their appointment.

On appointment, directors must sign a Consent to Act as Director [CM 27]within 28 days. Non-compliance does not invalidate the appointment, but is an offence under the Act [§211(4)]. Some companies require directors to hold qualification shares to qualify their appointment as directors. Where this is a provision in the articles, the shares must be taken up within two months of appointment. [§213]

Alternate directors

Directors can, with the approval of the board, appoint alternate directors. Alternates act on behalf of directors when directors cannot personally fulfil their duties. When serving in an alternate capacity, alternate directors have the same rights, duties and responsibilities as any other director and there is no distinction drawn in law between principal and alternate directors. The termination of the appointment of the principal director will ipso facto terminate the appointment of the alternate director.

Service agreements

In addition to the statutory requirements above, many executive directors also enter into a fixed term service agreement with their companies, that further regulates their relationship with the organisation. King II recommends that the term of these contracts should not exceed three years.

Induction and training

King II recommends that directors undergo a company induction when joining the board of a company. It also recommends training for directors with no prior board experience, and ongoing training as changing circumstances warrant.

Training should be formal and should include an overview of the business of the company and the legal responsibilities of a director covering at least the following: 

• company law as it applies to directors
• the roles and responsibilities of directors 
• duties and liabilities of directors 
• financial interpretation of company accounts, and 
• an awareness of non-financial matters relevant to the company
  

Persons disqualified from being a director

The following persons cannot be directors:

• a body corporate 
• a minor or person with no legal capacity (e.g. due to mental illness) 
• any person whom the Court has ordered cannot be a director or officer
  

The following persons cannot be directors unless authorised by the Court:

• an un-rehabilitated insolvent 
• any person removed from an office of trust because of misconduct, and 
• any person convicted of offences such as theft, fraud, forgery, uttering, perjury, corruption or dishonesty in connection with the formation or management of a company [§218, 219]
  

The standard articles of association (contained in the Companies Act) also imposes restrictions on the persons who may be appointed as directors. A director must resign if he: 

• is no longer capable of being a director in terms of section 218 of the Companies Act 
• without the consent of the company in a general meeting, holds any other office of profit under the company except that of chief executive or manager 
• is absent without permission of the board for more than six months from meetings of directors held during that period 
• is directly or indirectly interested in any contract or proposed contract with the company and fails to declare this interest and the nature thereof in the manner required by the Act [Article 65]
  

Disqualification

Directorships end if the director becomes disqualified to act as a director for any of the reasons set out above.

Removal

The shareholders of a company who follow the procedure laid down by the Act [§220] can also remove directors. Removal takes place even if the director has a service contract, although depending on the circumstances of the removal, the company may be liable to pay compensation< to a director who has been removed from office. Some companies amend their articles to allow the board to remove directors from office, however the standard articles do not contain this provision.

Retirement

Most articles of association require a third of the board to retire by rotation at each AGM. These directors are usually reappointed but need not be, thus giving members the opportunity to accept the retirement of directors they are not satisfied with.

Resignation

Directors may resign by tendering a letter of resignation. A director may resign for personal reasons, to resolve a conflict of interests, at the request of the chairman or because of the company’s insolvency (in which case the director should seek professional advice).

Key questions:

• Have I signed a Consent to Act as Director [CM27], and has an annual general meeting confirmed my appointment? 
• Am I required to hold qualification shares and have these been transferred into my name within the prescribed time? 
• Am I adequately trained to be a director and am I fully aware of the legal and fiduciary responsibilities which accompany that office? 
• Have I acquainted myself with the provisions of the Memorandum and Articles of Association and, where relevant, the shareholder’s agreement insofar as these contain provisions which affect my directorship? 
• Is my directorship subject to the terms of another agreement, e.g. a service agreement? 
• Is there any reason why I could be disqualified from being a director? 
• When am I next due to retire by rotation?